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Succession planning in family businesses is a multifaceted process, involving the transition of leadership, control, and ownership from one generation to the next. While it is a crucial phase for the continuity of the business, it can be fraught with complexities that must be carefully navigated to ensure a smooth and amicable transition.  

 In this article, we will explore the key considerations for both the older and younger generations. 

 As an important note, it is critical that before the succession planning process commences and progresses, all participants must have a clear and transparent understanding of the legal ownership and control structure of their business and its key assets. 

 For the older generation, a primary objective is security. This may encompass various aspects depending on individual circumstances, but would typically include: 

 Open Participation and Clear Agreements: An open and collaborative succession planning process is essential in ensuring that all affected family members have a confident, clear understanding of the agreed plan and arrangements.  

 Ownership of Residence: Ownership of their family home, free from any encumbrances. Alternatively, if their residence is located on a larger land parcel which is to be owned or controlled by the younger generation, a right of occupancy is established. 

 Ownership of Personal Assets: This includes the ownership of motor vehicles, investment portfolios, superannuation, and other significant personal use assets, ensuring their continued use, possession, and capacity to bequeath under their personal estates. 

 Secured Income in Retirement: A defined and secure income stream, indexed with inflation, for their natural life expectancy.  These arrangements are often secured via a combination of personal guarantees from younger generation, a family loan agreement, mortgages over nominated assets, and/or defined penalties for non-compliance. 

 Provision for Non-Business Heirs: Non-farming or non-business children must be considered, ensuring they are not overlooked in the succession and estate planning process. 

 Additional Funding: In some cases, there may be cause to include capacity to access additional, possibly one-off, funding of significant, nominated living costs, such as the partial or whole funding of a retirement home refundable accommodation deposit (RAD). 

 For the younger generation, security also plays a crucial role, but it has different elements, including: 

 Open Participation and Clear Agreements: Like the older generation, they want an open and collaborative process with a clear understanding of the agreed succession plan and arrangements.  

 Independent Business Control: Independent ownership and control of the business and key business assets, enabling them to make autonomous decisions regarding business operations, direction, and their future succession and estate planning. 

 Financial Commitment: A known and affordable financial commitment to the older generation and/or other non-farming or non-business family members. 

 Asset Protection: Minimizing exposure of the business and key business assets to business risk and to any potential personal estate claims. 

 Succession planning often involves restructuring the business and assets, which should align with both immediate and future family succession outcomes. This requires a careful assessment of the best options, constraints, and cost implications, including income tax, capital gains tax, and transfer duty. 

 All arrangements should be supported by legally binding agreements and, where necessary, should extend to include personal estate planning documents such as wills and powers of attorney. 

 In conclusion, succession planning in family businesses should be a considered, collaborative, and constructive process that ensures the security and wellbeing for both generations. Clear communication, thoughtful planning and appropriate, supporting legal documents are essential to navigate the complexities involved and to achieve outcomes that are best for all.   

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Thorntons is an accounting and advisory practice to mid-size, family-owned businesses in Western Australia. We offer a fully integrated portfolio of financial, tax, succession, and estate planning services and have the experience to guide you through the complexity so that you can enjoy stability, peace of mind and certainty. 

 To discuss your individual business needs and find out if we might be a fit for you, please contact Thorntons at tp@thorntons.biz or call (08) 9421 1722.